Interpreting contracts: it’s all common sense
The appeal courts are no strangers to spats over contractual interpretation. But not too many reach the Supreme Court. Rainy Sky v Kookmin Bank, though, dealt with an important point of principle. What should the court’s approach be where a contractual term is open to more than one interpretation?
Should you, as the Court of Appeal said, try to give effect to what is the more natural meaning of the words, and only then look at commercial sense if that produces a result so extreme as to suggest it was unintended. Or, having decided a clause is potentially ambiguous, should you simply adopt the interpretation which makes most commercial sense¹?
The answer, the Supreme Court held, is the latter: focus on the interpretation which is more consistent with business common sense. Not that surprising, you may think, and in this case there seemed to be little with which to quibble. The issue was whether Rainy Sky could call on guarantees issued by Kookmin Bank to protect payments made on a shipbuilding contract when the shipbuilder went insolvent. The court said Rainy Sky could call on the guarantees; that is what the security was all about.
In all, the Supreme Court’s general approach seems the right one, and – to make the obvious point – more likely to produce commercially sensible results. But, as Lord Clarke noted, it is not without risks. It does of course beg the question as to what is "business common sense". There may be any number of reasons why a party accepted a commercially unattractive term in a contract and, where coupled with the general rule that evidence of pre-contractual negotiations is inadmissible², the court may never have a full picture as to what those reasons were.
Potential ambiguities in commercial contracts can be fertile ground for a debate as to what was or was not commercially sensible at the time. Which, as ever, brings one back to the need for careful contractual drafting in the first place.
Lawyers Andrew Howell, Julie Simpson Day
¹ Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50
² Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
